Finance minister Nirmala Sitharaman was unequivocal in emphasising the importance of infrastructure for the economy. According to her, GoI is determined to give the required boost to industrial corridors, dedicated freight corridors, Bharatmala network of roads, Sagarmala and UDAN (Ude Desh ka Aam Naagrik) projects to improve connectivity and bridge the rural-urban divide. However, the budgetary provisions for infrastructure were unexpected.
Instead, GoI has decided to rely on off-Budget sources and public-private partnership (PPP) for funding and development of infrastructure. This approach can deliver the desired results only if the budgetary announcements are backed by swift policy reforms needed to address the problems besetting private projects and PPPs.
Aggregate investment has declined to about 30% of GDP, a rate much lower than the 15-year average of 35%. The consumption growth has also slowed down, as is the case with exports. In this scenario, increase in infrastructure investment is key to revising the virtuous cycle of consumption and investment. The multiplier effect of infrastructure spending on growth is extensive. Besides, a timely completion of infrastructure projects helps reduce logistical costs and increases economic competitiveness.
The vision laid out in the Budget is ambitious. Special attention has been paid to road and railway sectors. The investment target for the Pradhan Mantri Gram Sadak Yojana (PMGSY) has been kept at Rs 80,250 crore. This amount is to be used to upgrade 1,25,000 km of village roads. In February’s interim Budget, the finance ministry already made the highest-ever budgetary allocation of Rs 83,016 crore for highways and Rs 64,587 crore for railways. In addition, GoI plans to restructure the national highways programme to create a network of integrated highway grids to augment capacity and improve connectivity. Overall, infrastructure investment is slated to be Rs 20 trillion annually. Where will this money come from? The Budget has increased the special excise duty and raised the road and infrastructure cess on petrol and diesel. However, the growth in the direct budgetary support for FY20 is less than 7%. In an environment of low investment and slowing consumption growth, to support a growth rate of 8%, the infrastructure investment will have to grow at a much higher rate.
Monetisation of public assets has potential to supplement the resources needed to fund infrastructure. This can be done through the toll-operate-transfer contracts for national highways, infrastructure investment trusts and real estate investment trusts. Moreover, GoI seeks to tap the overseas bond market to raise required funds. Nonetheless, the infrastructure investment requirement can’t be met only through public funding. So, the Budget correctly emphasises the importance of the private investment as a key driver, which can add to capacity, improve product delivery by employing new technology, which, in turn, can boost economic competitiveness. Both the Budget and Economic Survey have underlined the centrality of PPPs, to be used to tap private funds to unleash faster infrastructure development. Besides, GoI plans to encourage foreign portfolio investment as well as FDI in infrastructure. It also plans to introduce credit default swaps for the infrastructure sector and encourage equity investment by NRIs. In principle, these measures can help boost infra-investment.
But private investment depends on the cost of capital, along with the magnitude and certainty of returns. Here, much more remains to be done. Several problems beset PPPs. These projects have been mired in contractual disputes with government departments and various regulatory hurdles. All these factors make infrastructure investment unnecessarily risky, and are the major reason behind non-availability of capital for PPPs and other private projects. The fundamental problem of infrastructure finance is the asset-liability mismatch. This problem can be addressed only by developing a vibrant bond market. A well-developed bond market will also benefit investment funds, such as insurance, pension and mutual funds, which are capable of investing in corporate bonds across different schemes. The increased limit for FDI in insurance sector intermediaries will add to the funds for the bond market. However, for the market to develop to the required depth and width, a compressive regulatory framework has to be put in place for both bonds and grading agencies. To boost private investment, budgetary announcements must be backed by policy reforms.
The writer is professor, Delhi School of Economics.